Elasticity of Demand and Supply as Price

Elasticity of demand and supply as price increases is an important concept which helps us understand how changes in price affect demand for a certain product. In this case, we shall be discussing the price elasticity of beef and eggs to see how the price changes for each would affect demand for them. In true economic sense, price changes have an impact on consumption patterns and hence on demand provided the income and other factors remain constant. In this case, we assume that price of beef and eggs has increased but all other factors including income have remained unchanged.

INCREASE IN THE PRICE OF BEEF:

Let us assume that price for one pound of beef was previously $1.50. But in the last one week, it has risen considerably to $2.25 per lb. Since income is constant, that factor doesn't come into play and only price alone can be held responsible for changes in demand. When price of beef goes up, people will consider some important things in their minds before they decide how to respond: a. they would want to know if beef has close substitutes, b. is it a luxury or necessity item and c. If there has been any change in the price of available substitutes.

Since beef is not the only kind of meat available, it means it has come close substitutes that people can switch to while the price is high. Instead of using beef, they can always use chicken or fish and therefore their consumption of beef can reduce considerably thus bringing down the demand for beef.

Since beef is not exactly a necessity item, it can be given up, even if for a limited time.

If the price of chicken or fish or other substitute meats increases while the price of beef is high, then the change in demand of beef would not be as dramatic as in the case of no change in price. For example if the price of chicken per lb. also goes up to $2.25 per lb. Or closer to it, people will continue to use beef instead of moving to substitutes. However if chicken is still $1.50 or lower, people would give up beef easily thus causing a dramatic change in demand for beef when price is high.

INCREASE IN THE PRICE OF EGGS

The same questions that a person would consider in the case of beef would also be considered in case the price of eggs move up but usually it happens so quickly in the mind that even the person himself may not aware of the process. When price of one dozen of eggs go up to$1.75 from $1.25 preciously, there is not likely to be a very dramatic change in demand because:

a. Eggs do not have any suitable or close substitutes. The absence of substitutes leaves people with no choice but to buy eggs even if the price is higher.

b. Eggs is a necessity item and people are willing to pay a little higher for something that they consume every day and what they consider a necessary part of their diet.

c. Since no substitutes are available, changes in their price is not applicable here.

But due to these reasons, it is clear why the change in price of eggs will not make a visible difference in demand. The demand for beef and eggs thus respond very differently when price for each goes up.

ANSWER 2

If the price of Pepsi doubles which the price of Coca-Cola has remained constant, there will be a higher demand for Coke while the demand for Pepsi would go down since they are very close substitutes for each other. Even though some people would prefer one over the other, the fact that they are very close substitutes has a high impact on demand on Pepsi or Coca-Cola if price increases for one while it stays the same for the other.

In case income is reduced by 30%, people will show a huge reduction in the consumption of Coke or Pepsi because neither is a necessity item and they are both luxury drinks. When income comes down, people make some important changes in consumption and the first to go are luxury items or rather unnecessary items and this would include carbonated beverages,